From Volume 7, Issue 7 of EIR Online, Published Feb. 12, 2008

Global Economic News

Prices Soar for Coal, Other Commodities

Feb. 4 (EIRNS)—Coal prices jumped 25% over the past week in trading centers in South Africa and Australia, after rising 73% globally in 2007. The price rose from $97 a ton for the week ended Jan. 25, to $11 a ton for the week ended Feb. 1, on the Newcastle market, and from $93 a ton to $116 a ton in Richards' Bay, both in South Africa, and today the price for coal for March delivery hit $130 a ton.

Other commodities are in the same soaring spiral, including agricultural goods and metals. ArcelorMittal South Africa announced that it is raising the price of its various basic steel products by 5-12%, as of March 1. China steel has increased its prices by $65/ton recently; and projections are that steel prices could increase by another $100 this Summer.

Until 2003-04, steel prices were in the $400 a ton range, then rose to $700 a ton, and now are taking off. A steel industry website,, has chronicled the price segments included in producing a ton of steel. From the beginning of 2005 through December 2007, iron ore is up almost 30%; thermal coal has almost doubled; and the higher quality coking coal is up 20%; natural gas is up about 50%, and electricity over 20%.

Report Predicts Soaring Foreclosures for Australia

Feb. 5 (EIRNS)—A joint study by JP Morgan and Fujitsu Consulting forecast that as many as 300,000 families will be foreclosed on in 2008—6,000 per week, a huge figure relative to Australia's 22 million inhabitants, and a doubling from a similar study done in September 2007. Another 350,000 are expected to be under "mortgage stress" (paying over 35% of their income for housing).

That news has really hit the headlines in Australia over the past 48 hours, forcing "third Way" Labor Prime Minister Kevin Rudd to comment that, "The pressures on working families arising from mortgage pressure ... are acute," but Rudd made clear that his first priority is "fighting inflation" through interest-rate increases by the Reserve Bank—which will throw hundreds of thousands more Australians onto the street, beyond even the current projections.

Australian homeowners have a debt-to-income ratio of 175%, even worse than the 130% in the United States, while Australian families spend 6.1 times their entire household income to buy a typical home, compared to 3.6 times in the U.S.A. New South Wales MP Paul Gibson told the Sydney Morning Herald on Feb. 5, "I have people every day coming to see me because they are homeless or have been waiting years for housing. It's just getting worse and worse."

Commercial Property Collapse in U.S.A. and U.K.

Feb. 6 (EIRNS)—The Financial Times reported today what EIR has been saying for months: that collapse of commercial property values will be the next big shoe to drop. Big U.S. property companies are unable to refinance short-term borrowings, like the New York developer Harry Mack, who has failed to refinance $5.8 billion in short-term loans. He reportedly lost control of the building he had purchased, to Deutsche Bank, which made the loans.

The Australian shopping mall developer Centro, which entered the U.S. market in a big way, now cannot refinance $3.4 billion in short-term debt. Ian Bruce Eichner, who developed a $3 billion casino-condo-hotel project in Las Vegas, defaulted last month on $760 million in debt. Investors are expected to see a 24% default rate, three times historic levels. In some areas, commercial property prices have collapsed by 10%. The same is happening in Great Britain, with British Land about to announce significant writedowns.

In Spain, the government is trying to put together a bailout of the country's collapsing real estate bubble, which has been among the largest in Europe. Prime Minister José Luis Rodríguez Zapatero wants to use the Public Credit Institute for an Eu10 billion credit line to help real estate developers and homeowners. PCI is an arm of the Spanish Treasury, with a writ to finance the promotion of technology and green energy.

In addition to the fact that this will not reflate the bubble, a government bailout would hit Spain's creditworthiness and therefore affect the rates given to its government bonds, already suffering a rise in spreads with German bonds.

The real estate sector continues to put out the lie that there is no problem and it does not need a bailout. Pedre Perez, head of the Spanish G-14 property group, claims that the whole story is untrue, and that "no such thought would cross our minds. Commercial property is still doing magnificently. This can be resolved by market forces."

Rio Tinto Rejects BHP Billiton Takeover

Feb. 7 (EIRNS)—The board of the world's third-largest mining company, the Anglo-Australian firm Rio Tinto, yesterday rejected the latest takeover bid of the largest mining company, BHP Billiton. The Wall Street Journal speculates on Feb. 7 about what the "right price" may ultimately be, but notes that one key shareholder "might not be swayed by shares or cash": the group including Aluminum Corp. of China (Chinalco) and Alcoa Inc., which last week acquired a 9% stake of Rio Tinto.

Chinalco's action, despite statements by Chinese officials to the effect that it was merely a financial investment like other recent Chinese "sovereign fund" investments, has a strategic economic dimension. The Journal reported at the time of the Chinalco/Alcoa acquisition, that China had been particularly concerned since the potential deal was announced last November, that a combined BHP-Rio "would dominate supplies of iron ore, aluminum, and other commodities and drive up prices." Indeed, Rio Tinto in mid-January moved to charge some of the steelmakers with which it has long-term contracts, three times the negotiated price. As the Journal explained, "Rio Tinto is exercising a little-known clause in its iron ore contracts that allows the company to supply just 90% of the contracted iron ore at a fixed, negotiated price. The other 10%, at the discretion of Rio Tinto, could be priced according to the spot market." The article reported that Chinese steelmakers in negotiations with the major exporters of iron ore said that the miners wanted a 75% increase in prices; Rio Tinto's iron-ore division CEO Sam Walsh was quoted to the effect that even that wasn't enough to fill the spot and benchmark price gap.

Among the speculations about the ultimate alternative to a BHP buyout, is that Rio Tinto may decide to carve itself up and sell off the pieces. The Journal notes that if it does so, the Chinese would be interested in Western Australian iron-ore deposits, since Chinese steel mills are the chief buyers of Australian iron ore and have been hit hard by price increases in recent years.

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